Will rate shocks hit your house price?

Interest rates may be heading for 6 per cent. Clare Francis asks if higher inflation could spur a property crash

Homeowners were warned that the risk of house-price falls moved a step closer last week after shock inflation figures raised the prospect of even higher interest rates.

The Financial Services Authority, the City watchdog, said lenders should prepare for a 20 per cent drop in house prices because the low interest rates and inflation that borrowers have enjoyed over the past five years are unlikely to continue - though it stressed this was not a prediction.

Inflation measured by the government's preferred consumer prices index rose from 2.8 per cent to 3.1 per cent last month - its highest level since the measure was introduced in 1997. Mervyn King, the governor of the Bank of England, was forced to write a letter to chancellor Gordon Brown to explain why it had exceeded 3 per cent.

Economists agreed that the inflation figures made a quarter-point interest-rate rise to 5.5 per cent in May